nep-mic New Economics Papers
on Microeconomics
Issue of 2023‒04‒03
twenty-two papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Funding and financing infrastructure: the joint-use of public and private finance By Marianne Fay; David Martimort; Stéphane Straub
  2. Search and Competition Under Product Quality Uncertainty By Chen, Yongmin
  3. Formation of Networks in a Context with Diversity By Darpö, Erik; Domínguez, Alvaro; Martín-Rodríguez, María
  4. Starting small in project choice: A discrete-time setting with a continuum of types By Hua, Xiameng; Watson, Joel
  5. Repeated Trading: Transparency and Market Structure By Ayca Kaya; Santanu Roy
  6. Product Innovation with Vertical Differentiation: Is a Monopolist's Incentive Weaker? By Serge Moresi; Marius Schwartz
  7. A Mechanism for Destabilizing Cartels By Soumen Banerjee
  8. How should performance signals affect contracts? By Chaigneau, Pierre; Edmans, Alex; Gottlieb, Daniel
  9. Obvious manipulations of tops-only voting rules By Pablo Arribillaga; Agustín Bonifacio
  10. Regret-free truth-telling voting rules By Agustín G. Bonifacio; R. Pablo Arribillaga; Marcelo Fernández
  11. Why Big Data Can Make Creative Destruction More Creative – But Less Destructive By Norbäck, Pehr-Johan; Persson, Lars
  12. Solidarity to achieve stability By Jorge Alcalde-Unzu; Oihane Gallo; Elena Inarra; Juan D. Moreno-Ternero
  13. Social herding in mean field games By Deepanshu Vasal
  14. Learning to Manipulate a Commitment Optimizer By Yurong Chen; Xiaotie Deng; Jiarui Gan; Yuhao Li
  15. Contests as Optimal Mechanisms under Signal Manipulation By Yingkai Li; Xiaoyun Qiu
  16. Simplistic Rhetoric and Poe’s Law By Giovanni Andreottola; Elia Sartori
  17. Prestige, promotion, and pay By Ferreira, Daniel; Nikolowa, Radoslawa
  18. Time-inconsistent contract theory By Camilo Hern\'andez; Dylan Possama\"i
  19. Designing binary social decisions By Kirneva Margarita; N\'u\~nez Mat\'ias
  20. Rivals’ Exit and Vertical Merger Evaluation By Javier D. Donna; Pedro Pereira
  21. Zero-Knowledge Mechanisms By Ran Canetti; Amos Fiat; Yannai A. Gonczarowski
  22. Multiplayer War of Attrition with Asymmetric Private Information By Hongcheng Li

  1. By: Marianne Fay (The World Bank); David Martimort (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Stéphane Straub (TSE-R - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - Université Fédérale Toulouse Midi-Pyrénées - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)
    Abstract: Attracting private nancing is high on the agenda of policy makers concernedwith closing the infrastructure gap in developing countries. To date, however, private nance represents a minor share of overall infrastructure financing and the poorest countries struggle to attract any private investors. This paper develops a model that rationalizes these facts. We characterize the structure of financial and regulatory infrastructure contracts and derive conditions under which public and private finance coexist. This requires a combination of regulated prices and public subsidies sufficiently attractive for outside nanciers pointing at a fundamental trade-off between financial viability and social inclusion. While improvementsin the efficiency of bankruptcy procedures facilitate access to private finance, institutional changes l owering the cost of public funds make public finance more attractive.
    Keywords: Infrastructure, Private finance, Regulation
    Date: 2021–05
  2. By: Chen, Yongmin
    Abstract: I review models of consumer search and competition when product quality is uncertain and differs across firms. Although firms are vertically---and possibly also horizontally---differentiated, an appropriate symmetric price equilibrium with optimal consumer search can be neatly characterized. I propose a "random-quality" framework that unifies these models and discuss their insights on the operation of consumer search markets, focusing on (i) online advertising and search through platforms, (ii) the welfare effects of entry in search markets, and (iii) the role of quality observability under search frictions. I suggest directions for further research on these and related topics.
    Keywords: consumer search, search cost, competition, product quality, firm quality, platform, entry, inspection goods, experience goods, quality observability.
    JEL: D8 L1
    Date: 2023–03–06
  3. By: Darpö, Erik; Domínguez, Alvaro; Martín-Rodríguez, María
    Abstract: We present a model analyzing the endogenous network formation prior to an infinite-horizon network bargaining game. We assume agents of two types with either one of two alternatives: connections among players of the same type are cheaper than among players of different type or vice versa. In this way, players not only need to consider the trade-off between more outside options and the costs of maintaining those additional links, but also what type of players they connect to. We characterize pairwise stable network structures through necessary and sufficient conditions, highlighting the role played by the way in which heterogeneous nodes are placed in the different components for the pairwise stability of the networks. Finally, we perform a welfare analysis, comparing the efficient structures with those that are stable.
    Keywords: Bargaining, Heterogeneity, Network formation, C72, C78, D85
    Date: 2023–01
  4. By: Hua, Xiameng; Watson, Joel
    Keywords: Project choice, Principal-agent, Renegotiation, Starting small, Gradualism, Perfect Bayesian equilibrium, Economic Theory, Other Economics
    Date: 2022–09–01
  5. By: Ayca Kaya (University of Miami); Santanu Roy (Southern Methodist University)
    Abstract: We analyze the effect of transparency of past trading volumes in markets where an informed long-lived seller can repeatedly trade with short-lived uninformed buyers. Transparency allows buyers to observe previously sold quantities. In markets with intra-period monopsony (single buyer each period), transparency reduces welfare if the ex-ante expected quality is low, but improves welfare if the expected quality is high. The effect is reversed in markets with intra-period competition (multiple buyers each period). This discrepancy in the efficiency implications of transparency is explained by how buyer competition affects the seller's ability to capture rents, which, in turn, influences market screening.
    Keywords: Repeated sales, adverse selection, transparency, competition, market efficiency
    JEL: D82 C73 D61
    Date: 2023–01
  6. By: Serge Moresi (Charles River Associates, Inc.); Marius Schwartz (Department of Economics, Georgetown University)
    Abstract: Extant literature shows that Arrow’s famous result—a secure monopolist gains less from a nondrastic process innovation than would a competitive firm—does not always extend to nondrastic product innovations. If the new product is horizontally differentiated, the monopolist can have a greater incentive to add the new product than a firm that would face competition from the old product; but the monopolist’s incentive to add the new product cannot be greater if the new product is vertically differentiated with higher quality than the old. This paper compares the incentives when the new product is vertically differentiated but of lower quality, a common case empirically. We show that, as with horizontal differentiation, the monopolist can have the greatest incentive to add the new product. However, in all the cases analyzed, consumer welfare (though not total welfare) is lower under monopoly, even when only the monopolist would add the new product. Our analysis also helps clarify why the ranking of incentives depends on the type of product differentiation and on whether the market is covered or not.
    Keywords: Product Innovation Incentives, Vertical Differentiation, Monopoly vs. Competition
    JEL: L1 L4
    Date: 2023–01–22
  7. By: Soumen Banerjee
    Abstract: Attention has recently been focused on the possibility of artificially intelligent sellers on platforms colluding to form cartels to limit output and raise prices. Such cartels, however, feature an incentive for individual sellers to deviate from the prescribed quantities and prices (cheating) to increase their own profits. Stabilizing such cartels therefore requires credible threats of punishments such as price wars. In this paper, I propose a mechanism to destabilize cartels by protecting any cheaters from a price war by guaranteeing a stream of profits which is unaffected by arbitrary punishments. This method applies to the sale of differentiated goods on (multiple) platforms or homogeneous goods through direct sales. This method for destabilizing cartels operates purely off-equilibrium, induces no welfare losses, features very low informational requirements (sale price and quantity data suffices) and does not depend on the choice of discount factors.
    Date: 2023–03
  8. By: Chaigneau, Pierre; Edmans, Alex; Gottlieb, Daniel
    Abstract: The informativeness principle states that a contract should depend on informative signals. This paper studies how it should do so. Signals indicating that the output distribution has shifted to the left (e.g., weak industry performance) reduce the threshold for the manager to be paid; those indicating that output is a precise measure of effort (e.g., low volatility) decrease high thresholds and increase low thresholds. Surprisingly, “good” signals of performance need not reduce the threshold. Applying our model to performance-based vesting, we show that performance measures should affect the strike price, rather than the number of vesting options, contrary to practice.
    JEL: D86 G34 G32 J33
    Date: 2022–01–01
  9. By: Pablo Arribillaga; Agustín Bonifacio
    Abstract: In a classical voting problem with a finite set of (at least three) alternatives to choose from, we study the manipulation of tops-only and unanimous rules. Since strategy-proofness is impossible to obtain on the universal domain of (strict) preferences, we investigate the weaker concept of non-obvious manipulability (NOM). First, we show that NOM is equivalent to every veto from any agent being a strong veto. Second, we focus on two classes of tops-only rules: (i) (generalized) median voter schemes, and (ii) voting by committees. For each class, we identify which rules satisfy NOM on the universal domain of preferences.
    JEL: D71
    Date: 2022–11
  10. By: Agustín G. Bonifacio; R. Pablo Arribillaga; Marcelo Fernández
    Abstract: We study the ability of different classes of voting rules to induce agents to report their preferences truthfully, if agents want to avoid regret. First, we show that regret-free truth-telling is equivalent to strategy-proofness among tops-only rules. Then, we focus on three important families of (non-tops-only) voting methods: maxmin, scoring, and Condorcet consistent ones. We prove positive and negative results for both neutral and anonymous versions of maxmin and scoring rules. In several instances we provide necessary and sufficient conditions. We also show that Condorcet consistent rules that satisfy a mild monotonicity requirement are not regret-free truth-telling. Successive elimination rules fail to be regret-free truth-telling despite not satisfying the monotonicity condition. Lastly, we provide two characterizations for the case of three alternatives and two agents.
    JEL: D7
    Date: 2022–11
  11. By: Norbäck, Pehr-Johan (Research Institute of Industrial Economics (IFN)); Persson, Lars (Research Institute of Industrial Economics (IFN))
    Abstract: The application of machine learning (ML) to big data has become increasingly important. We propose a model where firms have access to the same ML, but incumbents have access to historical data. We show that big data raises entrepreneurial barriers making the creative destruction process less destructive (less business-stealing) if the entrepreneur has weak access to the incumbent’s data. It is also shown that this induces entrepreneurs to take on more risk and be more creative. Policies making data generally available may therefore be suboptimal. Supporting entrepreneurs’ access to ML might be preferable since it stimulates creative entrepreneurship.
    Keywords: Machine Learning; Big Data; Creative Destruction; Entrepreneurship; Operational Data
    JEL: L10 L20 M13 O30
    Date: 2023–02–22
  12. By: Jorge Alcalde-Unzu; Oihane Gallo; Elena Inarra; Juan D. Moreno-Ternero
    Abstract: Agents may form coalitions. Each coalition shares its endowment among its agents by applying a sharing rule. The sharing rule induces a coalition formation problem by assuming that agents rank coalitions according to the allocation they obtain in the corresponding sharing problem. We characterize the sharing rules that induce a class of stable coalition formation problems as those that satisfy a natural axiom that formalizes the principle of solidarity. Thus, solidarity becomes a sufficient condition to achieve stability.
    Date: 2023–02
  13. By: Deepanshu Vasal
    Abstract: In this paper, we consider a mean field model of social behavior where there are an infinite number of players, each of whom observes a type privately that represents her preference, and publicly observes a mean field state of types and actions of the players in the society. The types (and equivalently preferences) of the players are dynamically evolving. Each player is fully rational and forward-looking and makes a decision in each round t to buy a product. She receives a higher utility if the product she bought is aligned with her current preference and if there is a higher fraction of people who bought that product (thus a game of strategic complementarity). We show that for certain parameters when the weight of strategic complementarity is high, players eventually herd towards one of the actions with probability 1 which is when each player buys a product irrespective of her preference.
    Date: 2023–03
  14. By: Yurong Chen; Xiaotie Deng; Jiarui Gan; Yuhao Li
    Abstract: It is shown in recent studies that in a Stackelberg game the follower can manipulate the leader by deviating from their true best-response behavior. Such manipulations are computationally tractable and can be highly beneficial for the follower. Meanwhile, they may result in significant payoff losses for the leader, sometimes completely defeating their first-mover advantage. A warning to commitment optimizers, the risk these findings indicate appears to be alleviated to some extent by a strict information advantage the manipulations rely on. That is, the follower knows the full information about both players' payoffs whereas the leader only knows their own payoffs. In this paper, we study the manipulation problem with this information advantage relaxed. We consider the scenario where the follower is not given any information about the leader's payoffs to begin with but has to learn to manipulate by interacting with the leader. The follower can gather necessary information by querying the leader's optimal commitments against contrived best-response behaviors. Our results indicate that the information advantage is not entirely indispensable to the follower's manipulations: the follower can learn the optimal way to manipulate in polynomial time with polynomially many queries of the leader's optimal commitment.
    Date: 2023–02
  15. By: Yingkai Li; Xiaoyun Qiu
    Abstract: We study the distribution of multiple homogeneous items to multiple agents with unit demand. Monetary transfer is not allowed and the allocation of the items can only depend on the informative signals that are manipulable by costly and wasteful efforts. Examples of such scenarios include grant allocation, college admission, lobbying and affordable housing. We show that the welfare-maximizing mechanism takes the form of a contest and characterize it. We apply our characterizations to study large contests. When the number of agents is large compared to item(s), the format of the optimal contest converges to winner-takes-all, but principal's payoff does not. When both the number of items and agents are large, allocation is randomized to middle types to induce no effort under optimal contest, which weakly decreases effort for all higher types.
    Date: 2023–02
  16. By: Giovanni Andreottola (Vienna University of Economics and Business (WU) and CSEF); Elia Sartori (CSEF)
    Abstract: We study the use of simplistic arguments in political communication, developing a novel model of mobilization through rhetoric with naive and sophisticated voters. We show that politicians sometimes choose simplistic arguments in order to appear more competent, exploiting what we call Poe’s Law, that is, the uncertainty on whether the argument used by the politician reflects her own competence or is ‘degraded’ to meet the demand for simplistic arguments of the naive electorate. We compare the Bayes Nash game with a game in which sophisticated voters are unable to conceptualize Poe’s Law, dismissing their peers’ cognitive abilities and identifying with a leader that speaks to a fully naive crowd. The two games have opposed predictions on how expected simplism departs from its demand-driven benchmark, as well as on the interpretation of extreme arguments. Our results demonstrate that dismissal is a valid rationalization of an overly simplistic political debate.
    Keywords: Simplistic rhetoric, Dismissal, Poe’s Law, Populism.
    JEL: D72 D82 D83 D91
    Date: 2023–02–17
  17. By: Ferreira, Daniel; Nikolowa, Radoslawa
    Abstract: We develop a theory in which financial (and other professional services) firms design career structures to “sell” prestigious jobs to qualified candidates. Firms create less-prestigious entry-level jobs, which serve as currency for employees to pay for the right to compete for the more prestigious jobs. In optimal career structures, entrylevel employees (“associates”) compete for better paid and more prestigious positions (“managing directors” or “partners”). The model provides new implications relating job prestige to compensation, employment, competition, and the size of the financial sector.
    Keywords: job prestige; professional careers; financial service firms
    JEL: F3 G3 R14 J01
    Date: 2023–02–15
  18. By: Camilo Hern\'andez; Dylan Possama\"i
    Abstract: This paper investigates the moral hazard problem in finite horizon with both continuous and lump-sum payments, involving a time-inconsistent sophisticated agent and a standard utility maximiser principal. Building upon the so-called dynamic programming approach in Cvitani\'c, Possama\"i, and Touzi [18] and the recently available results in Hern\'andez and Possama\"i [43], we present a methodology that covers the previous contracting problem. Our main contribution consists in a characterisation of the moral hazard problem faced by the principal. In particular, it shows that under relatively mild technical conditions on the data of the problem, the supremum of the principal's expected utility over a smaller restricted family of contracts is equal to the supremum over all feasible contracts. Nevertheless, this characterisation yields, as far as we know, a novel class of control problems that involve the control of a forward Volterra equation via Volterra-type controls, and infinite-dimensional stochastic target constraints. Despite the inherent challenges associated to such a problem, we study the solution under three different specifications of utility functions for both the agent and the principal, and draw qualitative implications from the form of the optimal contract. The general case remains the subject of future research.
    Date: 2023–03
  19. By: Kirneva Margarita; N\'u\~nez Mat\'ias
    Abstract: We design a mechanism, Majority voting with random checks, that fully implements the majority rule for binary social decisions. After a simultaneous vote over the two options, the winner must be confirmed by at least one agent from a random sample of agents voting sequentially. The mechanism incentivizes agents to act truthfully as a lottery is held if no agent confirms the outcome. Our mechanism also reduces by almost half the number of stages required for implementation. Furthermore, we extend our results to incomplete information and abstention and introduce additional implementation mechanisms based on the concept of network formation
    Date: 2023–02
  20. By: Javier D. Donna (University of Florida); Pedro Pereira (Instituto Universitário de Lisboa)
    Abstract: We discuss a subset of vertical mergers, where the exercise of market power and the efficiencies enabled by a vertical merger reduce rivals’ profits, making rivals’ exit a potentially serious concern. Rivals’ exit can fundamentally alter the welfare analysis of vertical mergers due to the reduction in product variety to consumers and the reduction in the number of competitors that would otherwise exert downward pricing pressure. An exit-inducing vertical merger might reduce welfare even if it is a welfare-enhancing merger absent exit. We present a theoretical framework to analyze vertical mergers that focuses on the possibility and consequences of exit, discuss the antitrust implications for merger evaluation, and provide examples. We argue that the possibility of rivals’ exit should be an integral part of the analysis of vertical mergers.
    Keywords: Antitrust, Vertical Mergers, Rivals’ Exit, Double Marginalization, Merger Evaluation, Competition Policy.
    JEL: K21 K41 L42 L44 L52
    Date: 2023–03
  21. By: Ran Canetti; Amos Fiat; Yannai A. Gonczarowski
    Abstract: A powerful feature in mechanism design is the ability to irrevocably commit to the rules of a mechanism. Commitment is achieved by public declaration, which enables players to verify incentive properties in advance and the outcome in retrospect. However, public declaration can reveal superfluous information that the mechanism designer might prefer not to disclose, such as her target function or private costs. Avoiding this may be possible via a trusted mediator; however, the availability of a trusted mediator, especially if mechanism secrecy must be maintained for years, might be unrealistic. We propose a new approach to commitment, and show how to commit to, and run, any given mechanism without disclosing it, while enabling the verification of incentive properties and the outcome -- all without the need for any mediators. Our framework is based on zero-knowledge proofs -- a cornerstone of modern cryptographic theory. Applications include non-mediated bargaining with hidden yet binding offers.
    Date: 2023–02
  22. By: Hongcheng Li
    Abstract: This paper models a multiplayer war of attrition game with asymmetric incomplete information on the private provision of one public good to investigate the effect of ex-ante asymmetry. In the unique equilibrium, asymmetry leads to a stratified behavior pattern such that one player provides the good instantly with a positive probability, while each of the others has no probability of provision before a certain moment which is idiosyncratic. Comparative statics show that one with less patience, lower cost of provision, and higher reputation in valuation provides uniformly faster. The cost of delay is mainly determined by the strongest type, namely the highest type of the instant-exit player. This paper considers two types of introduction of asymmetry: raising the strongest type tends to improve efficiency, whereas controlling the strongest type aligns the effect of asymmetry with the sign of an intuitive measure of the cost of symmetry.
    Date: 2023–02

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